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Business subsidies: booming at the worst time


A RECENT RUSH of business sector publicity seems to revel in the glories of state and local grants and tax lures to benefit private corporations. But a recent North Carolina court decision suggests the whole practice may violate some state constitutions.

Incentives for business are booming, the accounting firm of KPMG Peat Marwick announced late last month, promoting results of its survey of top tax or financial officers at 203 manufacturing, distribution and retailing firms with $300 million or more in yearly sales.

Boom times

Of the firms surveyed, 79 percent told KPMG that they were already getting such public concessions as property-tax rebates, income-franchise tax credits, job-training grants and state sales-tax rebates. Forty percent reported government incentives had grown more likely in the past year.

While social spending is being curbed by Congress and state legislatures, Peat Marwick obviously thinks public outlays to support business are terrific. "The states are becoming more pro-business," says Kerstin Nemec, associate director of KPMG's business-incentives group. "Taxes definitely matter to companies. Taking advantage of state and local tax incentives can make a significant difference in a company's bottom line."

FW's Corporate Finance, a business publication, rushed to exploit Peat Marwick's work, using the survey data for one of the strangest ranking of states yet -- how "generous" they are to out-of-state businesses seeking incentives. Alabama, California, Delaware, Idaho, Indiana, New Jersey, Ohio and West Virginia got the highest scores.

Investor's Business Daily quickly added a report of how Amarillo, Texas, sent each of the Fortune 1000 chief business executives a dummy check for $8 million, the value of promised tax and business incentives. The city received 250 phone queries and

actually landed four new companies.

Growth trend

All this is a growth trend, Joey Dixon, president of a Greenville, S.C., business tracking firm, told the New York Times. Mr. Dixon said the total number of state and local tax incentives was up from 450 to 600 just in the past year.

If correct -- and there's no reason to doubt it -- the timing of this apparent crescendo in giveaways of state and local tax bases could hardly be worse. The federal government is about to shift ** deep, extensive new responsibilities onto our states and counties and cities, in every area from welfare and medical care to environmental protection and job training.

With states and localities themselves under intense anti-tax pressure, every dollar will be needed for the basics of American communities' survival in the new global economic order. Constantly improved schools and colleges for work-force preparedness, quality ports and airports and transportation lines, cutting-edge technology, support for families to reduce dependency and expand our taxpayer rolls for the years ahead -- all are priorities. All will require serious investment.

Giveaways to corporations threaten to consume our society's seed corn, even as a new century of forbiddingly tough competition approaches.

So it has to be good news that North Carolina -- a Southern state that's long benefited from industrial migration -- is starting to hit the brakes.

BThe first action is legal: a decision by Judge Julius Rousseau, in Forsyth County (Winston-Salem), that a local statute earmarking public funds for incentives to individual businesses violates the state's constitution because it appropriates public money for private purposes.

Will decision stand?

The decision applies, so far, just in one county, but it's on fast-track appeal to North Carolina's Supreme Court. It's alarming politicians and economic development officials who fear it may make North Carolina a noncombatant in the interstate economic wars.

A reversal of subsidies in North Carolina might trigger suits in other states whose constitutions limit the use of public funds to truly public purposes.

Short of prohibiting incentives, officials need better ways to say "no" -- especially when one firm gets a subsidy and others rush to clamor for the same. North Carolina's Gov. Jim Hunt's Business Incentives Task Force, drawing heavily on university talent, recently produced a "state of the art" set of subsidy guidelines.

The new rules, now being implemented, tilt the tables toward business subsidies that will demonstrably raise North Carolina's technology base, increase wage levels and direct more investment to struggling rural areas.

And there'll be strict controls. In a state where one firm went bankrupt after receiving incentive money, grants will be held in escrow until new jobs are created. Companies must give the state written proof of competing offers -- "No more bluffing," notes one official. And businesses will be prohibited from getting funds if they're simultaneously downsizing somewhere else in North Carolina.

New guidelines

That means, of course, that North Carolina doesn't care if workers somewhere else are losing their jobs. And the new guidelines apply only to a competitive fund under the governor's control, not to special funds for so-called "trophy firms" like Mercedes-Benz in Alabama (which cost an all-time record of $200,000 a job).

But in today's climate, any signal of discipline and accountability to subsidy-hunting businesses represents good -- if rare -- news.


Neal Peirce writes on urban affairs.

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